Federal Reserve can only do so much

Marketplace Contributor Jun 21, 2012
HTML EMBED:
COPY

Federal Reserve can only do so much

Marketplace Contributor Jun 21, 2012
HTML EMBED:
COPY

Jeremy Hobson: The government said this morning the number of people applying for unemployment benefits fell last week by 2,000 to 387,000. That’s a sign of a weak-ish labor market. And that’s one reason the Fed decided yesterday to expand its monetary stimulus program known as Operation Twist. That means the Fed will buy more long-term Treasury bonds in an effort to boost the economy.

Diane Swonk is chief economist with Mesirow Financial — very plugged in at the Fed. She’s with us live as always from Chicago. Hi Diane.

Diane Swonk: Good morning.

Hobson: Well what’s your take on what they’ve decided to do?

Swonk: The Fed has done a little bit; reassuring us that they’re ready to act further if necessary. But they’re really hoarding their ammunition at this stage of the game — they don’t have a lot left should another crisis erupt. And they’ve certainly got a long list of headwinds they see going into summer.

Hobson: Are they watching Europe most, or the job market here? What’s the biggest concern for the Fed?

Swonk: Certainly all of the above — but Europe is the biggest concern, because not only is the job market in the U.S. weakening, but a financial crisis emanating out of Europe could easily through us into yet another financial crisis in the U.S., and weaken the U.S. economy into a recession. That’s something none of us want at this stage of the game. The problem is, the Federal Reserve does not make policy in Europe; they’re not political leaders in Europe, so much of this is out of their hands until the decisions are made.

Hobson: Let me ask you one more thing — oil prices this morning are at an eight-month low. And I wonder — isn’t that the real economic stimulus for most Americans?

Swonk: Absolutely. It’s one of the few economic stabilizers — we call out there automatic stabilizers. The weakening global economic growth has brought down oil prices, acting as a de facto tax cut at a much needed time in the U.S. economy.

Hobson: Diane Swonk, chief economist with Mesirow Financial. Thanks so much.

Swonk: Thank you.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.